Brazil’s Chickens Come Home to Roost

Years of living large and putting off economic reforms are finally catching up with Brazil.

Dilma Rousseff’s failure to liberalize Brazil’s economy is finally catching up with her. After narrowly winning reelection last year, popular outrage is backing the left-wing president into a corner.

Earlier this month, more than a million protesters took to the streets of Brasília, São Paulo and other major cities, angered by revelations of embezzlement at the state oil company, Petrobras.

The inclusion of members from the Brazilian Democratic Movement Party (PMDB) in a Petrobras corruption probe caused this biggest party in Rousseff’s ruling coalition to threaten to block austerity measures, such as tightening access to pension and unemployment benefits.

The PMDB has almost as many seats in Congress as Rousseff’s Workers’ Party and a reputation for allying itself with whomever is in government in order to reap the spoils.

Fiscal consolidation is necessary because the economy is shrinking after four years of just 1.3 percent growth on average.

When she won reelection in October, the news agency Reuters reported that Rousseff had convinced voters “her party’s strong record of reducing poverty over the last twelve years was more important than a recent economic slump.”

Now the slump is deepening and voters aren’t so sure. Rousseff’s personal approval ratings have plummeted to 13 percent, a record low.

Inflation is above 7 percent and price rises are likely to continue. The country is facing water shortages after a season of drought. Given that Brazil depends for much of its energy on hydroelectricity dams, the shortages could lead to power outages as well. The government intends to hike electricity rates 30 percent this year to deter unnecessary use. Higher taxes on fuel will add to consumers’ bills. Meanwhile the real has lost 10 percent of its value against the American dollar in the past month alone, raising the cost of imported products.

This is more than an unfortunate series of events. Rather it is the outcome of bad policy choices.

The Economist points out that Brazilian incomes have risen faster than economic output in the past ten years. Public sector workers have done especially well. In other words: Brazilians have enjoyed pay rises without actually becoming more productive. That has fueled an expansion in private debt and government largesse — chickens that are now come home to roost.

Rousseff did try to slow things down in her first term. She limited pension payouts to civil servants and capped government contributions for new hires, for example. But Brazil’s pension system is still one of the most generous in the world. The average Brazilian is able to retire at the age of 54 with 70 percent of pay. Pensions take up 13 percent of gross domestic product.

By contrast, the country spends just 1.5 percent of its GDP on infrastructure, compared with a global average of 3.8 percent, even though its weak network of ports, railways and roads is a huge bottleneck to growth.

Rousseff has done little to remove structural impediments to economic expansion which include a burdensome tax regime and excessive regulation. The World Bank considers Brazil to be the worst place in the world to file one’s taxes. Payroll taxes add a staggering 58 percent to the average salary. Import tariffs remain high while customs procedures sometimes amount to outright obstructionism of foreign trade.

The Financial Times agrees that Brazil’s mess is largely of its own making.

For a counterfactual, one only has to look at the more market-orientated Pacific Rim countries of Chile, Colombia and Peru. They enjoyed similar commodity and credit booms but without the same hangovers. Their economies are still growing fast.

There is some reason for optimism. The same newspaper argued last week that “the emergence of the Petrobras scandal in March last year is itself credit to the growing independence of Brazil’s judiciary and public prosecution service.” Rousseff has also made a good effort to stamp out corruption in the executive branch but that isn’t helping Brazilians make ends meet.